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How long can the bull keep running?

Nicki Bourlioufas  |  07 Apr 2017Text size  Decrease  Increase  |  

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While share markets both in Australia and the US look set to continue their ascent in 2017, an aggressive rise in interest rates from the Fed could stop the bull in its tracks.

 

If it feels like the current bull market has been running for years, that's because it has. The cyclical bull market in US shares that started in March 2009 turned eight years old this March to become the second-longest cyclical bull market since World War II. Some experts are tipping an ongoing run.

Equity markets around the globe have enjoyed a good upswing since late last year. In Australia, large-cap shares have led a market rally, with the big banks and miners lifting the values of many investors' portfolios.

According to Dr Shane Oliver, head of investment strategy and economics at AMP Capital, stock markets both in Australia and the US are set to continue their climb this year.

"Overall, we are still not seeing the signs of excess, euphoria, and exhaustion that typically come at cyclical economic and share-market peaks. So, barring some sort of external shock, the cyclical bull market in shares looks like it still has further to go," says Oliver.

"While short-term investor sentiment is excessively bullish, long-term measures of positioning are not. In the US, the huge investor flows into bond funds over the last few years have yet to reverse in favour of shares.

"In Australia, sentiment towards shares as a wise destination for savings remains low and investors still prefer bank deposits [see the chart below]. No euphoria here."

 

Australians remain cautious regarding shares


chart

Source: Westpac/Melbourne Institute, AMP Capital

 

An important point, says Oliver, is that Australian shares are not exceptionally overvalued. While shares are no longer cheap, nor are they overly expensive, often a sign of an overinflated market due for a drop.

"While forward price-to-earnings multiples in the US and Australia are above long-term averages, once the gap between share-market earnings yields and still-low bond yields is allowed for, shares are fair value to cheap, depending on the market," says Oliver, pointing to the following chart.

 

Share market valuations


chart

Source: Bloomberg, AMP Capital

 

Having said that, an aggressive rise in interest rates from the US could halt the bull market, according to David Bassanese, chief economist with BetaShares.

"With the global upswing broadening from the US to Europe and Japan, the equity bull market probably has at least a few more years left.

"That said, after a strong post-Trump rally, markets appear in need of a correction over the next few months, which could stem from further Fed tightening and strengthening in the US dollar."

In terms of Australian shares, a more sobering view comes from Jonathan Bayes, chief investment officer with Primestock Securities.

"I don't think the Aussie market is going up a whole lot more because our economy is spluttering along and there are no fresh economic catalysts. The Australian dollar is still too high, there's no fiscal expansion, and consumer indebtedness is maxed out."

In addition, with so much depending on Chinese global demand for goods, the bull market could be halted if the Chinese government withdraws its economic stimulus, says Alex Wright, a portfolio manager, UK equities, with Fidelity.

He says the rally in markets since late last year has been indiscriminate and some prices are bound to correct, including those of the big miners.

"The demand improvement in the mining sector is being driven primarily by Chinese stimulus, the economic value of which is highly questionable, and it is unlikely to last forever," says Wright.

"With no meaningful supply-side adjustment taking place in key industrial metal markets, there is a real risk of significant disappointment if a withdrawal of Chinese stimulus packages causes a fall in spot prices. As such, I continue to avoid the area for the time being.

"Markets are now expecting an earnings recovery across nearly all global cyclical areas. While there are some areas where these expectations could well be surpassed, equally there are other areas where I think there is a good chance of disappointment."

So, for investors who are hoping for a continuation of the bull run, it might happen. But markets can, at any time, correct if the right shock comes along.

As Chris Beauchamp, a market analyst with broker IG recently wrote on the bull market: "Everyone keeps looking around for the next sell-off, and indeed for the next reason for that sell-off."

"I would suggest that when it comes, for it will, it will probably be for an unexpected reason. And it will also provide an ideal opportunity for dip buyers."

So, his advice is to be ready.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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